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21 February, 2017

Making America broke again: Trump & the inevitable financial crisis

Trump can either ‘bite the bullet’ now if he really wants to improve the American economy or he can ‘kick the can down the road’ like his predecessors have, noted financial commentator Peter Schiff tells MintPress.

by Whitney Webb

Part 3 - The failures of Dodd-Frank

In the aftermath of the 2008 crisis, public outrage and anger at the country’s financial sector was palpable. In order to temper public sentiment, a massive piece of legislation known as the Dodd-Frank Wall Street Reform and Consumer Protection Act was assembled with the stated goal of minimizing risk in the U.S. financial system chiefly through the creation of new regulatory agencies and the establishment of certain consumer protections. While the current consensus holds that Dodd-Frank made some individual institutions technically safer due to the constraints it imposes, it is still widely regarded as an imperfect piece of legislation.

Indeed, prior to taking office, Trump joined a host of other conservative politicians in slamming the landmark legislation, which he has recently deemed a “disaster.”

The evidence regarding the legislation’s ultimate impact paints anything but a rosy picture. Despite Dodd-Frank’s well-stated intentions, things have not gone according to plan. The legislation actually has produced very few — if any — meaningful regulations, as the agencies tasked with drafting new regulations quickly became the focus of massive financial industry lobbying efforts. For example, three years after Dodd-Frank’s passage, commercial banking lobbyists had met with Dodd-Frank regulatory agencies 901 times, compared to just 116 meetings with lobbyists of consumer protection groups.

Nearly seven years after Dodd-Frank was passed, massive loopholes remain in derivatives trading, banks are still permitted to gamble with FDIC-insured money, and credit-rating agencies have yet to be reformed.

Further, in the years since the bill’s passage in 2010, the top five “too big to fail” banks continue to control the same share of U.S. banking assets they possessed prior to the crisis, while smaller banks and community banks suffered major losses, with some small banks losing as much as 20 percent of their share of national banking assets.

These smaller banks, which have great historical economic importance, essentially lost any competitive advantage to the nation’s banking behemoths. This is a concerning development, particularly because the big banks who largely caused the crisis suffered few ill effects while their smaller competition – who were largely uninvolved in derivatives trading and other activities that contributed to the crisis – has taken a major hit. A 2015 study conducted at the Harvard Kennedy School of Government confirmed this, finding that community banks had been absolutely crushed by Dodd-Frank regulations which caused the decrease in their markets shares to double.

To make matters worse, many of the “too big to fail” banks have ballooned in size since the passage of Dodd-Frank. For instance, in 2013, the country’s six largest banks owned an astounding 67 percent of all assets of the U.S. financial system, a 37 percent increase from 2008.

Many critics of Dodd-Frank, Trump included, have argued that the legislation was doomed to fail from the beginning. Indeed, the corruption scandals surrounding one of the bill’s co-authors suggest that this could be the case. Barney Frank, a former congressman from Massachusetts and chairman of the House Financial Services Committee, was embroiled in several notable financial scandals during his three decades in office, including some that took place during the 2008 financial crisis.

Prior to the crash, internal government documents obtained by government watchdog Judicial Watch showed that Frank was well aware that troubled lenders Fannie Mae and Freddie Mac were likely to fail, but did nothing to stop it. In addition, internal Treasury Department documents revealed that Frank sought to steer $12 million in federal bailout funds to OneUnited Bank, a bank located in Frank’s district, during the aftermath of the 2008 crisis. In 2015, Frank further cemented his shady ties to the financial sector by joining the board of Signature, a private bank with assets totalling $28.6 billion.

However, the true reason for Dodd-Frank’s failure is neither the corruption of one of its authors nor the weak and convoluted nature of the regulations it enforces. Dodd-Frank, whether it is ultimately repealed by the new administration or left largely intact, has failed to produce a recovery or prevent a future crisis because it ignores the true cause of the 2008 meltdown as well as that of the looming financial crisis: over a century of misguided and self-serving central bank policy.

As Schiff remarked when speaking to MintPress, “The Federal Reserve is the culprit.

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